Assets management companies: investment in mutual funds may be made mandatory

The Securities and Exchange Commission of Pakistan (SECP) is likely to make it mandatory for asset management companies (AMCs) to retain certain minimum investment in the funds, as was approved by the policy board in its meeting on March 4, official sources told Business Recorder.
The policy board, headed by the Finance Minister, was also unhappy over low growth in mutual funds despite tremendous growth in asset under management (AUM), sources said.
Executive Director (ED), Specialised Companies Division (SCD), in a recent briefing to the policy board on the mutual fund industry provided the history of the industry in Pakistan key statistics as of December 2007, comparison of local industry with regional and international markets.
Globally, the mutual funds industry stands at $25.82 trillion and has been exhibiting steady growth. However, in Pakistan, despite tremendous increase in AUM, primarily led by income funds, the mutual funds industry, relative to regional markets and as percentage of GDP and bank deposit, remains small, sources quoted ED as saying.
According to them, he said that supply of new securities, particularly listing of equities, weak distribution network, heavy reliance on institutional investors, and lack of product innovation were highlighted as some of the key factors inhibiting further growth.
Different measures taken by SECP to tackle the above factors were highlighted in particular as permission to invest overseas, launch of REITs framework, facilitation in launch of new products, capital protected funds, enhanced role of Mutual Fund Association of Pakistan (MUFAP) in areas like performance standards, qualification of distributors and advertisement standards.
According to sources, the policy board was informed that SCD plans to initiate investors' education campaign to create awareness about mutual funds so that investor base could be expanded.
On the regulatory side, it was informed that a comprehensive on-site inspection plan has been put in place under which 90 percent of AUM would be inspected in next 12 months and this would be supplemented through off-site surveillance.
"These inspections, apart from routine regulatory compliance, would look for issues like churning and front running," sources said.
The Board Chairman, who is Finance Minister, desired that information about types of mutual funds available in Pakistan, ratio of bank deposit/GDP, AUM as percentage of market capitalisation, and percentage of free float held by mutual fund industry should also be included in the presentation.
He further desired that SECP should prepare a comprehensive roadmap for growth of mutual funds industry covering areas like number and types of funds, investor base and potential of Islamic products.
"This then should be used as benchmark for annual goals and identify areas where SECP and GoP support is required for market development," sources quoted Finance Minister as saying.
He also desired that SECP should arrange a study of performance of mutual funds both on gross and risk adjusted basis so that a meaningful comparison could be made between performances of different funds.
For alignment of interest of asset management company with that of the mutual fund, Finance Secretary suggested that it should be made compulsory for the AMCs to retain certain minimum investment in the funds. After deliberations it was decided that SECP would review this point.
Presentation on leasing sector was showing downward trend of all key financial indicators. For identifying reasons for this downward trend a 'Strengths/Weaknesses/Opportunities/Threats (SWOT) analysis was presented.
Finance Secretary gave a comprehensive review of thought process behind formation of NBFCs concept and why banks, owing to lower cost of funds, were giving tough time to leasing companies.
He was of the view that some protection must be given to the leasing companies so that they could compete with the banking sector at level footing.
According to sources, SBP Deputy Governor said that it has been agreed between SECP and SBP that banks can maintain lease portfolio up to 30 percent of their assets, beyond which they are required to form a separate leasing subsidiary.
The Chairman observed that universal banking is a fact of life. However, he desired that difference between cost of funds and lease rate of banks and leasing companies should be analysed to assess viability of leasing companies. In the light of the analysis, if required, corrective measures may be taken to support the leasing industry, sources added.